Cost pressure may force Abercrombie & Fitch to report a loss in Q2

Abercrombie & Fitch Co. (NYSE: ANF) is set to report its second-quarter earnings on Thursday before the market opens. The results will be hurt by elevated operating expenses, foreign exchange currency headwinds, higher promotional activity, as well as investments in mobile, omnichannel and digital business fulfillment.

During the second quarter, the company will incur $45 million of pre-tax lease-related charges primarily related to the present value of future lease payments, which will be due subsequent to stores closure. The company expects to close its SoHo Hollister flagship store in New York City in the second quarter. On May 28, the company terminated its Fukuoka, Japan A&F flagship store lease with closing likely to occur in the second half of the year.

The global economic uncertainty, such as the United Kingdom’s decision to leave the European Union and greater uncertainty with respect to trade policies and tariffs, could cause changes in consumers’ discretionary spending habits globally. This, in turn, could have a material adverse effect on the company’s results, liquidity, and capital resources.

The company’s sales and profitability will be impacted by the failure to anticipate customer demand and changing fashion trends as well as managing its inventory. The profitability is expected to be hurt by the failure to successfully implement its long-term strategic plans due to risks including macroeconomic, strategic, operational, legal, tax, regulatory, and compliance.

Analysts expect the company to report a loss of $0.52 per share on revenue of $852.32 million for the second quarter. In comparison, during the previous year quarter, Abercrombie posted a profit of $0.06 per share on revenue of $842.41 million. The company has surprised investors by beating analysts’ expectations in all of the past four quarters.

Read: Anaplan Q2 earnings review

For the first quarter, Abercrombie & Fitch reported a narrowed loss driven by positive comparable sales backed by ongoing strength at Hollister and a return to positive comps at Abercrombie. Net sales rose by 0.4% year-over-year as foreign currency exchange rates hurt the latest quarter negatively by 2%.

For the second quarter, the company expects sales in the range of flat to up 2%, comp sales to be flat, and gross profit rate to be down about 100 basis points. For fiscal 2019, the company predicts sales growth of 2% to 4%, comp sales to be up low-single digits, and gross profit rate to rise slightly from last year’s 60.2% rate.

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